What is ESG investing?
ESG is a term used to refer to three factors; Environment, Social and Governance, which assess a company’s sustainability and society impact.
The idea is that the higher a company’s ESG profile, the more stable and sustainable their practices are and therefore the higher and more stable their financial performance will be.
Quick reference:
Environment includes issues like climate change, sustainability, natural resources and pollution/waste control.
Social include human resources, policies and practices around diversity and inclusion, animal and human rights, and consumer protection.
Governance addresses issues associated with corporate governance such as diversity in Board of Directors, management structures and staff, transparency, ownership and fair practices such as no gender pay gap.
How does it work?
ESG is usually measured by a percentage. There are groups online that rate companies in terms of ESG factors and this can be a useful place to start exploring. Alternatively, you can search for a specific company’s ESG and go from there.
It’s important to remember an ESG is an overall number, so it might be valuable to dig into how a company is performing for each factor individually.
For example, perhaps it’s more important to you that a company has sustainable environmentally practices rather than governance factors. In which case, you could take their ESG as an overall guide and look deeper into their environmental policies and practices.
Alternatively, there are ETFs (exchange traded funds) that target companies with strong ESG profiles. Either choice you make, it’s still a good idea to do some research into a company or fund before you invest with them in order to assess whether its values match yours.
A simple example…
Company X produces clothes that are made from ethically sourced materials which are sustainable. It pays employees a fair salary and enforces safety practices in the factory. Board members and management staff include people from a range of backgrounds.
Company Y, on the other hand, produces clothes made from unsustainable materials that cannot be recycled. Employees are paid fairly but the Board of Directors lacks diversity.
Since Company X seems to value ESG practices more than Company Y, they would be expected to have a higher ESG profile. So for an ESG investor, like yourself, rather than spending a lot of time researching both companies, you could choose to focus on Company X. You can look deeper at their policies and critique whether they are doing what they say they will do in terms of sustainable practices.
Then you can use this information to shape your financial strategy and build your portfolio.
This gives you, as an investor, a great deal of power.
By investing your money in companies that incorporate practices that are sustainable and align with your values, you are supporting them to grow and have more power in the market. Additionally, by not investing in companies that do not value ESG factors, you are sending a message and encouraging these companies to adapt their practices to be more sustainable.
Kate Harris is a copywriter at MakeImpact, a Nordic Impact Fintech that helps individuals make sustainable investment decisions through their values.
